Cut through the jargon – know what your advisor’s credentials mean
It often looks like the average financial advisor’s business card needs a few extra lines to fit all their certifications. And to the average investor, those certifications remain a mystery – for example, what is the difference between a certified financial planner and a chartered financial professional?
“It seems that every other TV commercial is a financial services company with a very compelling sales pitch,” said Van Mason, CFP®, CLU, MBA, president and registered principal with StoneRidge Wealth Management, based in Beaverton, Oregon. Mason added that investor education remains key to getting would-be clients in front of the advisor who can serve them best.
Lack of knowledge, exacerbated by many investors’ shaky financial literacy, leaves investors vulnerable to financial services providers who do not have the client’s best interests at heart. Fiduciary advisors, meanwhile, might struggle to connect with clients with a low knowledge base.
“Any successful relationship is built on excellent communication and the advisor-client relationship is no different,” said Christopher R. Manske, CFP, president of Manske Wealth Management in Houston. “For that communication to exist, both parties must have a certain level of financial literacy which means that educating the client is just as important a duty as speaking with clients in a way they can understand. One of the ways we help clients to achieve financial stability is by providing an informal course of instruction to each client. We offer this transparently so that clients don’t feel they’ve been enrolled in a class, but they do feel it’s important to us that they have the tools to be able to communicate with us. They understand that we want them to comfortably guide our relationship toward the goals that are important to them.”
The first step to being financially informed is for an investor to understand what the “letter-salad” on their advisor’s business card means. “Advisors Magazine” looked into the most common financial certifications and found more than 20 such designations; the seven most common of those are explained below. Advisors’ list is not exhaustive by any means, but prospective investors attempting to wrap their heads around the many, many different licenses, certifications, and designations need to start somewhere.
CFP® – Certified Financial Planner™
The “gold standard” for financial professionals, certified financial planners undergo intense training and must pass rigorous exams to become board-approved. Professionals with CFP designations also are held accountable to the Certified Financial Planner Board of Standards strict ethical codes. Advisors holding a CFP designation must work within the fiduciary standard, meaning that clients’ best interests come before the firm’s bottom line.
CFA® – Chartered Financial Analyst®
A relatively uncommon designation in personal financial advising, the Chartered Financial Analyst® credential is more likely to be found in large firms. A would-be CFA must have several years of experience and pass three grueling exams in investment management, stocks and bonds, and derivatives, and other financial concepts. Industry professionals believe the CFA designation to be the highest, strongest qualification in financial analysis.
ChFC® – Chartered Financial Consultant®
A designation offered by the American College of Financial Services – an educational non-profit dedicated to the development of financial services professionals – the ChFC® requires a less rigorous process than the CFP or CFA to acquire, but still involves several exams, which must be backed by three years of professional experience. ChFCs must take and pass exams covering financial planning, behavioral finance, and more specific topics such as serving divorced clients.
CIMA® – Certified Investment Management Analyst®
The Certified Investment Management Analyst® holder usually works in a large financial consulting firm and handles large accounts. The CIMA designation marks the holder as having a high level of expertise in asset allocation, ethics, risk measurement, investments, and due diligence. To acquire a CIMA, a candidate must have three years of industry experience, a record of ethical conduct, and complete a classroom program. CIMA candidates must also pass two rigorous exams and participate in continuing education programs throughout their careers.
Series 7 or RR – Registered Representative
An advisor with this license is commonly known as a stockbroker, or broker. The Series 7 license is granted by the Financial Industry Regulatory Authority (FINRA) to those who have passed the difficult Series 7 exam. Licensed brokers are regulated by FINRA as well, and investors can check out their prospective advisor using the organization’s BrokerCheck database. Series 7 holders are licensed to sell securities.
CPA – Certified Public Accountant
The official license needed to be a practicing accountant. An advisor who holds a CPA has passed the Uniform Certified Public Accountant Examination after completing the required hours of accounting experience. While preparing taxes may require a CPA, few financial advisors will hold this designation and outsource tax preparation instead.
CAIA – Chartered Alternative Investment Analyst℠
A designation held by advisors who work with asset classes beyond the usual stocks and bonds such as derivatives or real estate. The CAIA designation is granted by the Chartered Alternative Investment Association®, an industry group formed in 2002. Financial advisors with this designation will specialize in investments that are non-traditional or used to divert risk away from the stock market. CAIA holders often work for hedge funds and other financial organizations that look outside stocks and bonds to manage risk.
RIA – Registered Investment Adviser
Registered Investment Adviser firms receive compensation in the form of fees for providing financial advice and investment management. They are required to act as a fiduciary. This is very different from broker-dealers and their representatives, who provide recommendations for a commission. Broker-dealers and their representatives are not required to act as a fiduciary, they simply must make suitable recommendations for a client. This is a different standard of care, but most consumers are unaware of the difference, as any of these professionals may call themselves a financial advisor.
In some instances, a firm may be "dual registered", meaning they are a registered investment adviser along with being registered as a broker-dealer. In that case they may provide advice for a fee and collect a commission on certain product sales.
Do credentials really matter?
Credentials matter, several experienced financial professionals told “Advisors Magazine” in recent interviews. Beyond the organizational, legal, and ethical requirements that many credentials meet, the various industry designations show at a glance what an advisor’s specialty is, what skills they may have, and whether or not they are held to certain conduct standards.
“An advisor who earns and maintains such credentials shows a commitment to an advanced degree of worldly knowledge beyond government licensing as well as committing to high ethical standards,” said Mark Minnella, CFS, CFCA, CKA, president of the National Association of Christian Financial Consultants, Inc., which offers its own credential – the CFCA. Minnella designed the faith-based CFCA program, meaning Christian Financial Consultant and Advisor.
Certain credentials such as the CFP also require holders to act as fiduciaries, meaning they must put clients’ best interests before commissions or profit. Prospective investors need to research which credentials adhere to that standard to know which advisor will protect their interests. And would-be clients need to be especially careful of “dual-registered” advisors, who can be flexible in which standards they follow.
“As a client, you must do your homework and keep a keen eye for conflict of interest if working with a dual registered advisor, since they could elect to follow the fiduciary or suitability standard depending on which investment offering to you is most beneficial to them from a compensation perspective,” said Shaun Thompson, CFA®, CFP™, senior wealth advisor with Peak Financial Management, based in Wellesley, Massachusetts.
Investors need to ask their prospective advisor several questions, starting with whether they are fiduciary, to really know if the relationship is right for them. Anyone can call themselves a “financial advisor,” after all, said Eric L. Gabor, CFP®, EA, founder of Eagle Grove Advisors, LLC, based in New York. The credentials separate the advisors who have paid their dues, completed rigorous training, and committed themselves to the profession from fly-by-nights and salesmen, he added.
Gabor suggested asking questions not just about credentials, however. Additional questions such as how an advisor stays current, how they get paid, and what type of succession plan is in place all need to be considered as well. Asking an advisor what their greatest financial mistake was also could provide insight into how they think and react in difficult situations, he said.
The fiduciary standard exists to protect investors, but not everyone needs to work with an advisor held to it. Many do-it-yourself investors prefer to work with broker-dealers who execute client trades on request, for example.
“In my opinion, broker-dealers should not be held to a fiduciary standard. If a client wants or needs a fiduciary relationship, he or she can simply choose to work with an independent Registered Investment Advisor. Some investors, particularly those that want to make their own decisions and direct the broker to implement them, may prefer the broker-dealer relationship,” said J. Brent Everett, founder, chief investment officer, and partner at Generational Wealth Advisors, based in Richardson, Texas. “We need more education, not more regulation. Investors already have a choice.”
With the alphabet-soup of credentials floating around in the market, choice is guaranteed, and education is definitely a must.